The Australian Securities Exchange Corporate Governance Council unveiled the Fourth Edition of its Corporate Governance Principles and Recommendations recently. Listed companies are encouraged to follow seven new recommendations, along with 28 pre-existing recommendations, many of which have been updated.
Overall, the Fourth Edition signals the Council’s focus on corporate culture and values, calling for increased transparency from listed entities and a broader set of governance considerations, including considering stakeholders other than shareholders.
General Counsel, company secretaries and lawyers advising listed entities should be across the recommendations in the Fourth Edition. This will allow them to effectively advise listed entities on their corporate governance obligations. Quick answers to some frequently asked questions follow.
When will the guidelines come into effect?
All Australian listed entities with a 31 December balance date will be required to measure their governance practices against the recommendations in the Fourth Edition from 1 January 2020. The deadline for entities with a 30 June balance date to start reporting against the Fourth Edition recommendations is 1 July 2020.
The Council encourages early adoption though, so it’s a good idea for your publicly listed company client to start thinking about the recommendations sooner rather than later.
What is the Corporate Governance Council looking for?
The Council is clearly focused on company culture and values as well as encouraging companies to consider the expectations of the general community.
The Council wants companies to avoid the poor corporate behaviours identified in the final report of the recent Banking Royal Commission. To do this they should move away from a corporate culture focused on the short-term pursuit of profits, to one which looks to long-term advantage and considers the broader community while aiming to preserve and enhance the company’s reputation.
I’m a member of a board. What do I need to know?
If you’re a director on the board of a listed company, you would know that you’re under greater scrutiny in the wake of the Banking Royal Commission, which heard testimony from board members of financial institutions, indicating they did not know what was going on in middle to higher management, and implying they were not directly responsible for the misconduct that occurred.
The Council expects boards to “set the tone from the top”, approving a statement of values and a code of conduct.
The Council also expects boards to question and challenge those in management positions of all ranks and expects board charters to make it clear that the board is expected to hold management to account. Having an appropriate number of independent, non-executive directors can help the board as a whole to do this. The Council also recommends that entities ensure that the board members should receive copies of all material market announcements promptly after they’ve been made, so that they are properly informed.
Did the Banking Royal Commission influence the updated guidelines?
Yes. The guidelines even include a footnote paraphrasing Commissioner Hayne’s comments in the Final Report about the tension between the short-term pursuit of profit and long-term advantage. For a company to succeed in the long term, it needs to preserve its reputation and standing in the community, which means that shareholders are not the only stakeholders that boards need to consider.
Which policies should I opt to have and does the market need to know about them?
To meet the revised recommendations, listed entities need to adopt charters and policies to encode their values and create a framework for good and consistent corporate governance. The required documents include:
- A Board charter,
- A diversity policy,
- A code of conduct for directors, senior executives and employees,
- A whistleblower policy,
- An anti-bribery and corruption policy,
- A continuous disclosure policy.
Under the old edition of the principles and recommendations, it was enough for a company to disclose a summary of a required charter or policy. This is no longer the case. Charters and policies now need to be disclosed to the market in full.
What are the consequences for companies who don’t change accordingly?
As always, listed organisations are not obliged to adopt the ASX Corporate Governance Council’s principles and recommendations. But if, for some reason, a principle or recommendation is not taken up, you should be prepared to justify it, as the company will need to report on which principles and recommendations it has not adopted, and why not.
For an side by side comparison of the third edition versus the fourth edition, the Practical Law Team has compiled an in-depth report on the topic to help you see what has changed and what the changes mean. Simply fill out the form on this page to download “ASX Corporate Governance Council releases fourth edition of the Corporate Governance Principles and Recommendations: What has changed?”.